Play ball! Maybe. The future of the 2022 MLB season had been in question for weeks, but a deal has been reached. The MLB and Major League Baseball Players Association have been trying to come to terms on a number of issues—one of which is the competitive balance tax, or CBT.
Introduced in 1997, the CBT is intended to place a soft salary cap on teams and disincentivize teams in larger markets with higher capacity to pay players from simply “buying their way” into October. There is, at least theoretically, a perceived risk of a vicious cycle wherein teams with thin fanbases in small markets win less, make less, can pay players less, and around we go. Whether the CBT is functioning to offset the spend-to-win incentive is an open question, but it does not appear to be tied to maintaining a competitive balance at all.
The CBT Explained
The CBT is in essence a luxury or excise tax on player salaries, imposed on teams. The MLB Commissioner’s Office sets a target salary threshold. For 2021, it was $210 million, and teams that go over that threshold are taxed 20% of the overage during the first season they go over, 30% the second consecutive season, and 50% for each consecutive season thereafter. Teams can “reset” their rate by dropping below the threshold for a season.
From the collected CBT, 50% of the total is distributed to teams that did not exceed the threshold. The other 50% is distributed according to various other agreements to myriad player benefit plans.
Whether this serves its purpose in making smaller-market teams more competitive is up for debate—but without question, it creates distortive effects in its attempt to increase competition.
Distortive Effects of the CBT
1. Tying the tax to player salaries punishes higher compensated players.
The intent of the CBT is to level the playing field for the purpose of competitiveness—not to disincentivize teams from compensating their players well, retaining well-paid players, or signing players to long-term contracts. And yet, under the CBT, a team is indeed incentivized to pay players as little as possible, for as short of a time as possible, within the bounds of retaining their fanbase and thus their profitability.
There is also a messaging problem for the fans. It is how much the players are making that is the subject of debate and consternation each year—not how much the team made, the valuation of the franchise, or the considerable perks bestowed upon the ownership, such as getting a new stadium paid for by the taxpayers of the state it sits in. This has a deleterious effect on one’s view of a player; your favorite team cannot sign your favorite player because he wants too much. The overall effect redounds to the team’s benefit in placing the fans on the side of the team: Whatever happened to just playing for the love of the game?
2. The economic incidence doesn’t fall on the team with the highest ability to pay but instead on the team that has chosen to allocate more revenue to player salaries.
The CBT’s clear goal is to encourage teams to develop talent rather than buy talent and ensure that smaller-market teams can remain economically viable. But an excise tax on a team’s payments to players does not necessarily place the highest economic incidence on the teams with the best capacity to bear the burden—just on those that have chosen to allocate a significant portion of their spending to player salaries.
Fan turnout is not tied to a knob labeled “this year’s player salaries”—simply turning up the salary for a year, or even permanently, does not necessarily lead to more exciting baseball, more wins, or more fans.
There are several more accurate measures of a team’s ability to pay a true competitive balance tax, including total revenue, team valuation, and executive compensation. If you want more exciting baseball, encourage teams to pay for great players and play the long game in terms of foregoing some dividends in furtherance of the franchise.
3. The assumption that highly paid players attract fans and profits is a questionable one.
If economic viability is tied to fan interest and attendance, taxing player salaries is a very blunt instrument for getting to the root of the issue. The tax might just as plausibly be levied on total advertising spending, ballpark giveaways, facility upgrades, public transportation improvements, television and streaming income, or sponsorship income. If you want to encourage fans to come out, a highly compensated player is not an attraction. You’ve never seen a fan wearing a jersey with a player’s salary on the back.
On the spending end of the CBT, earmarking the distributions to teams under the CBT threshold for specific expenditures—subsidize Oakland replacing the atrocious Oakland Coliseum the Athletics are condemned to play in for eternity, for example, or pay Tampa Bay to replace their dome where the Rays play with something that retracts—could be a way to ensure competition is actually being encouraged and pockets are not being lined.
Additionally, the payouts made to underperforming teams, if they are indeed increasing competition, should come with some check on performance. Teams that receive CBT payouts should have performance milestones that need to be met or amounts will be reduced. These metrics may include turnout in addition to wins and playoffs performance.
The CBT Should be a Team Wealth Tax
In reality, the closest thing to a true competitive balance tax would be a tax not on a given team’s willingness to pay its players for a single season, but instead on the value of the team as a whole.
A wealth tax is a tax on the value of all assets owned by a taxpayer. In the MLB context, this would be a tax on the total team value—all contract values, streaming rights, merchandising, brand value, etc. By way of example, as of 2021, the top three most valuable teams were the New York Yankees ($5.2 billion), the Los Angeles Dodgers ($3.5 billion), and the Boston Red Sox ($3.4 billion). A simple 3% wealth tax on valuations above $2 billion would capture the top nine most valuable teams and net approximately $191 million. In 2019, estimates of CBT paid by the three teams that exceeded the threshold—the Red Sox, the Yankees, and the Chicago Cubs—were in the vicinity of $30 million.
A wealth tax on the clubs themselves gets to the heart of the stated intention of the CBT, fostering competition. Subsidizing less-established teams with a tax on dynastic major-market teams will bring the league much closer to true parity—and will remove the fulcrum of whether there will be baseball when the next collective-bargaining agreement expires from the backs of players.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Andrew Leahey is a tax and technology attorney in Pennsylvania and New Jersey.
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